Literature Review Relating Towards Mergers And Acquisitions
“Merger is defined as a situation in which two companies voluntarily join together, producing the ownership interest of the two sets of shareholders who come to own the newly combined entity” (Buchanan et al 2007) further described by Sloman and Hinde as “a situation in which as a result of mutual agreement two firms decide to bring together their business operations where as a merger is distinct from a takeover, As a takeover involves one firms bidding for another shares often against the will of the directors of the target firm; one firm thereby acquiring another”. (Sloman and Hinde p.324 (2007))
The account of mergers and acquisition conclude either in a negative or positive manner but the disadvantages of the process vary. Hence, the research paper focuses on the managing of the post merger consequences in a subtle manner which occur in many of the organizations specially banks and financial institutions all over the world that plans a hostile or a friendly approach to collaborate with each other. According to Lowe banks all over the world are merging at a very rapid rate. Lowe (1998), Saunder and Walters argue “there is a zest for centralization and consolidation of banking services” (Saunder and Walters 1995) cited in Lowe (1998) since the major planning of most of the mergers and acquisitions of today are carefully measured to make sure that the best outcome can be achieved and a better organizational and cultural fit of goals, achievements can be associated between the two companies, Moreover the global village of today, with its economic and strategic barriers to growth, paves the path for mergers and acquisitions as the major sources of organizations trying to improve on their performances and speed up the process of growth and accelerating revenue.
Similarly the motives for bank mergers and acquisitions around the globe are manifold and highly diverse as noted by Rose (1999, p. 677). Some intent to center primarily upon the maximization of shareholder efficacy all the way through probable post merger amplifications due to increasing profit projections, multiplying operational efficiency, redundancy of operations, increased market share and capacity for expansion, or for the prevention of costly governmental regulations, while Rose also mentions “other bank merger motives seem more closely connected to the goal of optimizing management’s welfare through increase managerial compensation, reduced risk to employee tenure, or enhanced managerial reputations in the labor market” (Rose 1999). Mergers and acquisitions are also a probable source of reducing risk and because it involves the usage of both the parties resources i.e. in a manufacturing industry the use takeover or merger of a supplier as a backward integrating firm would enhance the firms performance, therefore allowing for more diversification since the resources are now adequate for further usage which would benefit the organization its shareholders, management and the supplier by a more subtle way of distribution costs over a wider area allowing for greater stability.
Cartright and Cooper state that ‘the prospect of increasing profitability and market share by merger and acquisitions continues to exercise a more seductive and immediate appeal to business leaders than a reliance on growth alone” (Cartright and Cooper 1993) Cited in [Salama; Holland & Vinten (2003)], where as Anguin continues to state mergers and acquisitions are having “a unique potential to transform firms and contribute to corporate renewal” Anguin 2001 Cited in (Vinten et al 2003). To further understand the benefits of mergers and acquisitions based on Griffiths (2005) it has been observed in Buchanan (2007) that Toyota and Citroen have joint hands together in their Czech subsidiaries in the production of their super mini cars employing their best of research, technology and people, to develop a vehicle with the same features and prices from which it can be seen that the benefit to Toyota is little and Toyota is sacrificing much of its share just to benefit from working with a company which is well aware of the current market in which Citroen is selling 200,000 units and Toyota 100,000 but they have merged strategically allied to drive other competitors out of the market to an extent.
In the past it was observed by financial economists that usually people consider and prefer the integration process to be implemented over a longer period of time as it would require careful assessments of the market typologies and most probably minimize the occurrence of inaccuracies as time would play the role of an assessor of faults and ambiguities which was considered to be very appropriate and profound. But with today’s modern technological advancement, globalization with forces competing all round the globe information world organizations necessarily urge the need to adapt and respond as swiftly as possible. Hence the assumption based on Daft (1997) that a timely merger and acquisition is among the most important developmental response to market-based change. If they are not implemented quickly, their opportunities will dissolve before they can extract the rewards. Feldman has said, “Companies that win are those that learn faster, act quicker and adapt sooner” (1999:21).
Vinten et al analyzed the case studies of the Integration of Deutsche Bank and Bankers trust which was a procedure requiring six months, He concluded that integration strategy and timing contributed a lot in successful acquisition of the process, further with the analysis of the industry by Stoehr who stated that the conditions were favorable at the time of acquisition and he quoted “the synergies we created in bringing the two banks together were immediately seen because the market was there and …of course, success breeds success the moment you are on a winning tour all challenges will be overcome”. Stoehr Cited In (Vinten et al 2003). The reason why Deutsche bank collaborated with the banking trust outlined were due to the underlying process of organizational cultural transformation and growth performance in the past, bringing success and prosperity to the organization. In Stoehr account the success of the transformation was solely due to the top managements supervision of the enigma between the period when the acquirer had made the commitment of announcing the deal and the duration when the deal actually took place. But with the success of a merger, merged organization face several challenges which result in a total devastation. Over which Myers and Brealy (1996) claim that scale and pace of merger has been constantly increasing they also mention that to analyze the reason to merge first, the benefits and cost of a merger should be measured cost also relate not to physical costs involved but also at cost of cultural change and cost of human activity, because the challenges organizations face includes their failure to recognize and accomplish many strategic objectives, in another study by Huang and Kleiner statistics showed that
“Only 23 per cent of all acquisitions earn their cost of capital.
In acquired companies, 47 per cent of executives leave within the first year, and 75 per cent leave within the first three years.
In the first four to eight months that follow a deal, productivity may be reduced by up to 50 per cent.
Moreover, CEOs and CFOs routinely cite “people” problems and cultural issues as the top factors in failed integrations"(Galpin and Herndon, 2000:2).cited in [Huang and Kleiner (2004)]
However; the results that showed represented in these statistics include some uncertainty and approximations relating to a number of factors. The most important point is that merger and acquisition creates a huge gap between cultures of an organization and conflict of interest arises also good management is difficult to achieve and plays the most important role for the success of the organization. But certainly it can be seen that merger and acquisitions have been the major source of growth where in Malaysia the numbers have exceeded between banking and financial sector mergers , some of them are shown in the table below.
Huang and Kleiner mentions that several studies have showed that the cultural incompatibility is consistently rated as the greatest barrier to successful integration. For instance, a 1992 Coopers and Lybrand study reported that in one hundred failed or troubled mergers, 85 per cent of executives who were surveyed said that the major problem was differences in management style and practices. A 1996 British Institute of Management survey also reported underestimation of the difficulties involved in merging two cultures to be a major factor in failure (Galpin and Herndon, 2000:3). Culture difference is the major obstacle to the merger, i.e. Southwest Airline’s acquisition of Morris Air. “According to Lublin and O’Brien, Southwest spent two months exploring its cultural compatibility before finalizing the acquisition in 1993. Known for its can do attitude and friendly esprit, Southwest was committed to finding a partner with a similar orientation. As a result, the integration was completed successfully in only 11 months, rather than three years as it was originally estimated” (Galpin and Herndon, 2000:26).
In another study by Huang and Kleiner a prolonged transition adds cost, destroys profit, and decreases cash flow. When asked, “If you had to do it over again, what would you do differently”? Nine out of ten participants in the Pricewaterhouse- Coopers survey said they would respond and move faster during the post deal transition (Domis, 1999). President of Wells Fargo and Company commented on the company’s troubled takeover of First Interstate Bankcorp said, “If I had to do it over again, I would have done it faster” (Domis, 1999). In fact, surveys have shown that employees feel uncertainty when integration moves slowly. “Slow integration process approach lets problems fester, and it fails to take advantage of the energy stirred up by mergers and acquisition event” (Clarkson, Pritchett, and Robinson, 1997:130). Those companies will compress time by making informed decisions about economic value creation, and focused resource allocation. They will use these decisions to take early firm stands on management deployment, organization structure and culture. These actions will increasingly help them to sustain long-term and economic value creation (Feldman, 1999:21) cited in Huang and Kleiner 2004.
Li and Hung further clams that “A wide body of evidence has suggested that the management of human-related factors in the post-acquisition implementation is very important, and half of the acquisitions failed because they were badly managed. Cartwright and Cooper (2000) point out the fact that about 50 percent of mergers and acquisitions do not achieve the anticipated outcomes and HR management can play a role in reducing the distress and loss of productivity during the M&A processes”. Cited in (Hung et al 2006)
Huang and Kleiner, The effect of the merger and the duration in which it takes place is also critical because with this period increasing question arises as to what will happen with employees as well as other stakeholders panic, because mergers and acquisitions create immense change in organizational structure and by changing management structure issues. Bellou cites that “Mergers and acquistions are nothing but extreme forms of organizational change, and change is often perceived by employees as threatening, due to their feeling of vulnerability and fear of losing security (Saunders and Thronhill, 2003). Under these circumstances, they have become increasingly important in helping to redefine employment relationships (Anderson and Schalk, 1998; Cartwright and Cooper, 1993; Guest, 1998; Herriot and Pemberton, 1995, 1996; Hiltrop, 1995; McLean Parks and Kidder, 1994; Turnley et al., 2003).cited in [Bellou (2006)] hence managers must meet frequently and respond swiftly. The importance of the personal issue is of great importance to management and employees at all levels. Huang and Kleiner state “Employees commonly get blindsided, emotionally jolted by the news that their corporate family is being reshaped and given a new authority structure” . Before people become curious about combined market share, they consider the personal impacts. Will I lose my job? Will my pay be affected? Will I have to move? These questions underscore the real issues in the minds of managers and employees. Everyone is suffering from the unknown. “No area in corporate life is more sensitive than employee relations” (Yunker, 1983:21). Having a company perceived as a good environment to work by employees, as reasonable in relations with labour unions, are critical attributes in attracting good workers. Yet, managers tend to ignore this sensitive area frequently during mergers or acquisitions (Yunker, 1983:21) cited in Huang and Kleiner 2004. Furthermore they also mention that the changes in existing policies and procedures must be handled carefully and explained to the employees before they are implemented. Sufficient time must then be allowed for a reaction and feedback. In order to minimize the worries about changes in the existing policies and procedures, managers must discuss fully the reasons behind the corporation’s policies and procedures.
Huang and Kleiner also state the reason and complications arising because the two corporations do not match on different aspects of the payroll this includes the basic pay proposition whether an employee get an fringe benefits or not, or any annual increments is the par base similar for all employees and what benefits are there for employees working since a long time, furthermore is the promotion based on performance or seniority. Hence all these issues pile up and become a disputable topic before the organization can proceed with a merger, Yunker says “Salary administration people should begin to review and discuss these matters (Yunker, 1983:25). Just as in the salary levels, companies must also have competitive benefit programmes (Yunker, 1983:27). Cited in Huang and Kleiner 2004.
When organization join another issue it faces involves span of control and reporting relations when it expands in such circumstances a usual outcome would be how would a person report to so many different people where two companies collaborate. Which one is he accountable for and what action would the other one take if he falls in a misconduct scenario. Mergers and acquisitions also make the communication channels grow longer due to more people being involved. Moreover, due to its larger size, some employees may unintentionally get left out of the loop. Therefore, trying to maintain closer-than-usual contact is very important (Clarkson et. al., 1997:145) cited in (Huang and Kleiner 2004). In any change effort, leadership is important in providing clear direction for the move into an uncertain future. However, leadership is difficult to obtain in major change efforts, especially in mergers and acquisitions. Ensuring that someone is in charge of providing a clear sense of direction (Clarkson et.al.,1997:146).
Furthermore many employees faced the problem of being threatened or feeling incompetent due to mixing with more talented people and develop a fear of losing job (Huang and Kleiner 2004) define that these transformations create vigorous need for more communication between top managers and lower level of employees and employees as well as managers should be better geared up for any changes taking place due to the joint hands of the company, and they should have already instantly and immediately acted to rectify the situation through added procedural justice with more communication between all employees. Making customers the top priority after the integration of the organizations leaves no space to diverge from the profits (Huang and Kleiner 2004) state that during merger and acquisition integration, companies become more introspective. Immediately after the deal is announced, the focus of both companies turns inward. The most vulnerable areas of the companies are sales and service. Shortly after a merger and acquisition, many organisations experience lower sales, as well as increased complaints about customer service. When sales and service suffer, people in these groups tend to blame the merger or acquisition. Therefore, managers must ensure to maintain the standards of sales and service that their customers expect. Actions to boost sales and service must be overtly planned and quickly executed (Galpin and Herndon, 2000:49).cited in (Huang and Kleiner 2004).
It is viewed that usually, managers who tend not to offend others in the newly acquired organization always delay the tough decision. Especially in a merger or acquisition, it is difficult to be perceived by every employee as totally fair. Top managers have to make decisions quickly and implement them. Otherwise, both companies will think that the top management is unorganized (Clarkson et.al., 1997:148). Moreover, People tend to resist change, and the degree of change involved in combining two organizations is massive. The extent of the change often fosters resistance that may destroy even the best-planned merger. Studies have shown that a major reason for failure of merger and acquisition is what they call “political risk”, which they describe as the risk that changes will not be completed because of organisational resistance (Galpin and Herndon, 2000:51). There is a notion that people resist change and that a slow transition gives employees time to adjust. Unfortunately, the thinking is wrong! People do not resist change. If people do resist change, progress would never be made anywhere. Revolutions would not happen. No innovation would take place.“What people resist in the single most punishing effect of change is uncertainty. Prolonged uncertainty is unbearable. To reduce the resistance, you must reduce punishment” (Feldman, 1999:35). Lastly, Once the deal has been consummated, management in the acquired company needs a redefinition of their authority, reporting relationships and accountability. In addition, employees should be given a clear understanding of the standards of performance they will be expected to perform. The step should be taken as soon as possible after the deal has been consummated (Clarkson et.al., 1997:140).
Furthermore one more problem faced is Buyers and sellers not having idea on how to conduct business which they must have clear ideas on how to operate the business after the merger or acquisition. Needless to say, corporate marriages are usually followed by disputes, frustrations and uncertainty. Therefore, both corporations should agree in advance as to new procedures, paperwork, and timing requested by the buyer for spending for people, facilities, equipment, and service we can see that organizations do face many problems and usually success is very less as Liang and Rhoades (1988) from the Federal Reserve Board conducted a direct test of banking diversification over at least three measures of earnings risk using a sample of more than 5,000 U. S. banks. They found a generally negative relationship between market diversification and bank risk exposure over the 1976- 85 periods, but also lower mean levels of net earnings. Moreover, more geographically diversified banks appeared to take advantage of that diversity by posting lower capital- to- asset ratios. Unfortunately, the Liang- Rhoades study contained only a handful of cross border banks and the majority of sampled institutions served only one or two market areas under the same political jurisdiction.
In contrast, Goldberg and Hanweck (1988) looked directly at a small group of interstate banking companies grand fathered by the U. S. Bank Holding Company Act, but found no evidence that cross- border acquisition status aided the grand fathered institutions in profitability, growth, or market share relative to their competitors. In fact, the interstate firms suffered erosion over time in their deposit shares. A newer test by Lee (1993) finds evidence that the banking affiliates of more geographically diversified, publicly- traded holding companies tend to possess stronger bond ratings and greater mean price- earnings ratios. Lee concludes that cross- border bank acquisitions probably pose greater operating risks for banks, but also tend to generate greater potential returns.
Lowe in his study of the post merger after math has recognized several aspects of the consequence of such collaboration, He found that “wherever mergers happened in organization there were times of trauma and great uncertainty” and “where banks merged it is more fundamental than the other types of corporate mergers” (Lowe 1998) because there is a prerequisite requirement whether for an individual or an organization needing to merge that it first needs to asses and analyze the financial feasibility and the occurrence of these feasibilities in the form of financial transactions, because merger between banks has an equal and individual effect not just over the economy of a country but it is liable to effect the life of every individual.
The most important issue that needs to be critically analyzed in the post-merger aftermath depends on which organization has the power over the other, or which bank has taken over the other bank and has a strong an dominating position over it merged or acquired bank and hence the dominant bank exhibit its superiority over the other using their original head office as a base for the operation of the new bank as well. More often does it also places its old employees and people in the key strategic positions over the board of directors and only has quota for the representation of the acquired firm’s employees in its board of directors; hence the process of default remodeling begins by the dominant bank. After the merger the dominant bank mainly focuses widely on human capital that all the employees comply with its policies, rules and regulations and that all employees are practicing and trying to adopt the code of conduct but this process merely happens as a natural phenomenon and usually does not require any training or development. These consequences occur as a default process. This process appears naturally within the dominant bank, this process creates a gap between the employees and the bank whereby the employees cannot focus on their relationship with the bank and raise the issue of which bank has to follow or which association are they related to i.e. the dominant bank or the weaker bank, customer also face the same problem by which their focus diverts on to. If they should still follow the bank or not because of them considering the weaker bank as a sign of disaster to their integrity and risk of loss. Employees working for the descendent bank face the issue of risk and uncertainty of their jobs. Lowe says at “such times of crisis the ascendant (dominant) bank will default to the values with which it is familiar and which it understands. Since banking is principally based on trust the ascendant bank tends to distrust the information in the files of the clients in the descendant bank (Weak) (Lowe 1998). The transition allows for lack of trust in the bank by customers and there arises a dilemma of ambiguity for the consequent deciding customers and the newly merged bank itself of whom to follow. Lowe further argues “customers of the descendant bank are discriminated against and will tend to leave. These customers are often dismayed because they are unaware of the new criteria which the ascending bank is introducing until it is too late”. Unfavorable consequences could arise even for the dominant bank because loss of customers is mostly essentially a very huge misfortune not only could they lose customer but employees might even tend to disassociate with the firm losing all of its important and experienced staff. Lowe’s default remodeling after merger only enable only helps in situations where the bank is fully aware and can cope with uncertainty in the different between the firms and evaluate what the process would help them with, which would help them plan more carefully to further avoid any of the disastrous effects which could also imbalance the merger, the default remodeling of relationships happens in three main ways (which are shown in figure 1) :-
Terminating relationships; or
Neglecting relationships (Figure 1).
In grounded theory terms these are referred to as subcore variables of the theory of default remodeling.
Cultivating relationships involves two key stages with further sub categories the first covert supporting involves favoring. This form of supporting happens in a way which is not made visible to other business to business relationships the dominant partner may have. Second comes deal sweetening which involves offerings by the firm to only a few. It is a manner of recognizing the weaker partner as an important part of the organization and that the relationship developed is of very much importance, third and the last is customizing which occurs when the business recognizes the needs of its weaker partner and understands that they are to be satisfied rather than looking at its own interests.
Lowe claims overt supporting as the beginning of established behavior and the instance when the business partners feel more confident and this makes it easier for them to express their relationship with their favored clients overtly by recognizing and entitling. Recognizing involves supporting the relationship with rewarding and recognizing the client. “The most important and observable form of recognizing is in corporate hospitality which can range from the lavish to the token. Entitling the second form of overt behavior involves supporting as the most prestigious institution and when the dominant business partner extends special privileges to favored clients. In a banking context, clients who have the closest relationship with the bank receive certain entitlements” (Lowe 1998).
According to Lowe research businesses have to end relations which are not if any use to the organization and which create disturbances in the organizational procedures this can be done by the Coercive isolating which Lowe defines as when “one of the business to business partners systematically begins the process of freezing out the other party” (Lowe 1998). A particular feature of coercive isolating happens when the most dominant of the business to business partners wishes to terminate the relationship as quickly as possible. The main categories of coercive isolating are stigmatizing, tainting and intimidating.
In Stigmatizing “the dominant business partner in the relationship has a stereotypical view of its smaller weaker business partners and uses formularization to screen out those it is not interested in dealing with”. Tainting “involves when a client already has an existing commercial agreement and way of working with a larger more dominant business partner which is then involved in a merger and loses out, the client becomes tainted by association. The important aspect of this for the weaker business partner who has been found guilty by association is to try to establish what the values are of the new powerful ascending partner in the post-merger situation. If they fail to do this they will be tainted. In the immediate aftermath of a merger those clients who previously banked with the descendant bank are victimized by the new bank. Intimidating involves pressurizing the smaller business or weaker partner to perform according to the dominant companies’ procedure and “deliver a higher level of performance than contractually obligated with the threat of punitive sanctions for non-compliance.
Neglecting relationships Lowes further argument concedes business relationships which are neglected because they are not considered to be a great importance for one or other of the parties concerned. Benign denial is one aspect of neglecting here the dominant partner demonstrates their neglect for a business partner by benign denial. This happens when the most powerful partner in the business relationship no longer interested in developing the relationship and is disinterested, secondly is the misunderstanding which randomly occurs between the partners which grows a great level for growing misunderstandings, lastly comes distancing where the dominant business partner does not consider the weaker business as a part of its family and leaves it aside for isolation.
In conclusion, Lowe has conducted a research upon the usage of such remodeling scheme as a contribution to the successful implementation of mergers of organization and that all the barriers can be accounted for and removed once the system has been integrated. Then, Lowes approach is adopted to finish of the roles and positions which do not create value in the organizations well being.
Figure 1 :-
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